Kenya central bank holds rate at 10% on muted inflation pressures

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Written by Central Bank News

Published: November 24, 2017 9:56 PM

Kenya's central bank retained its Central Bank Rate (CBR) at 10.0 percent, as expected, saying it's monetary policy committee had "concluded that inflationary pressures in the economy were muted, and inflation was expected to continue to decline in the short term."

The Central Bank of Kenya (CBK), which has kept its rate steady since cutting it in September 2016, added that it was continuing to monitor the impact of the government's interest rate caps on the effective transmission of monetary policy, with the committee meeting against a backdrop of favorable weather conditions, sustained macroeconomic stability, the conclusion of a prolonged period election period, and improved outlook for the global economy.

In September last year Kenya's government imposed a cap on banks' interest rates despite concern by bankers and the International Monetary Fund, which said experience from other countries shows such rate controls are ineffective, impede the effectiveness of monetary policy, can give rise to unintended consequences, lead to lower economic growth and undermine efforts to reduce poverty.

The CBK's policy decision comes after its governor, Patrick Njoroge, earlier this month said inflation was now well anchored and he expects inflation of around 5 percent in 2018 and beyond.

Kenya's inflation rate eased to 5.72 percent in October from 7.06 percent in September and a 5-year high of 11.7 percent in May on higher food prices from drought.

The drop in October inflation was largely due to lower food prices, with the decline offsetting higher fuel and electricity prices. Non-food-non-fuel inflation remained below 5 percent, demonstrating that demand pressures are muted, the CBK said.

The CBK, which targets inflation of 5.0 percent, plus/minus 2.50 percentage points, also said a market survey in November showed that inflation was well anchored and is expected to decline in the short term.

Respondents also expected the exchange rate of the shilling to remain stable supported by strong diaspora remittances and sufficient CBK foreign exchange reserves.

The central bank's foreign exchange reserves currently stand at US$ 7.094 billion, the equivalent of 4.7 months of import cover, down from $7.545 billion in September. However, together with $1.5 billion in a precautionary arrangement with the IMF, the CBK said the reserves provide an adequate buffer against short term shocks in the foreign exchange market.

Kenya's shilling has been relatively stable in the last two years, with the shilling trading at 103.3 to the U.S. dollar today, down 1 percent this year.

There were widespread fears among bankers that the government's cap on commercial lending rates at 4 percentage points above the CBK's, and a floor on deposit rates of 70 percent of the key rate, would lead to less credit to businesses.

The CBK said today private sector credit grew by 2.0 percent in the year to October as compared with 1.7 percent in the 12 months to September, maintaining an upward trend since August.

The central bank's November survey also showed optimism about economic prospects after the conclusion of the elections, improved weather conditions and public investment in infrastructure.

Despite drought in the first half of the year and prolonged elections, economic growth in Kenya has remained resilient and is expected to expand by 5.1 percent this year and "pick up strongly in the medium term supported by a stable macroeconomic environment," the CBK said.

Kenya's economy grew by an annual rate of 5.0 percent in the second quarter of this year, up from 4.7 percent in the first quarter by down from 5.8 percent in 2016.

Kenya has been through two presidential elections this year, with the Supreme Court having to review both results. After the result of the first election in August was nullified, the court this week dismissed two petitions challenging the October result, paving the way for the inauguration of President Uhuru Kenyatta for a second term.